Starting a Foundation

What Is a Private Foundation?

The IRS considers any tax exemption organization a private foundation (with some exceptions, such as hospitals and universities). Most domestic foundations pay an excise tax on their net investment income.

Obtaining tax exempt status is granted to organizations that operate exclusively for religious, charitable financial support, scientific, literary, or educational purposes. Political organizations may be tax exempt.

Private foundations usually have a single funding source, such as charitable donations from a single family’s members or a corporation.

The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.

Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.

What Does a Private Foundation Do?

Private foundations make donations to other organizations, which are called grants. These funds may be granted to individuals as well. The assets of a foundation are called an endowment.

Should You Start a Private Foundation?

Consider an area close to your heart where you have the means to make an impact but without an existing organization or institution. In that case, start a foundation or a private foundation. Remember that running a private foundation can be time-consuming and expensive, and it’s essential to understand the legal and financial aspects, including personal liability.

Example of a Thriving Charitable Foundation

Before starting private foundations, you should study a few existing ones that are thriving and prosperous.

One such trust is the MJ Murdock Charitable Trust, which provides funding for education and spiritual growth projects in addition to arts and scientific research programs happening within the Pacific Northwest states of America.

The trust’s origin goes back to 1975 and was started by the interests of Tektronix, founded in 1946, through a bequest from Jack Murdock’s estate. The Trust was started with $91 million (an amount that has grown to more than $975 in funding initiatives for different nonprofit corporations. Today, the Trust is worth $1.2 billion. The Murdock Trust is an intelligent example of starting a foundation as an ultra-high-net-worth individual. The nine tips for starting foundation management are based in part on the Murdock model.

9 Tips to Starting a Foundation and Fulfilling Your Ultra-High Net Worth Retirement Goal of a Family Legacy and Impact

1. Direct Your Estate Plan to Start the Foundation Source

By far, this is the most critical step you must take. You may have a retirement goal of starting a foundation or a family foundation, but what happens to your goal if you die prematurely?

This is what happened to Jack Murdock, who died in 1971. His foundation began in 1975. He directed that three appointed trustees start charitable grants “to nurture and enrich the educational, cultural, social and spiritual lives of individuals, family members, and community.”

Not only did his estate plan require starting a foundation in his name, but he gave it a clear mission. This ensured that even more than 40 years later, his foundation still funds nonprofit causes that align with his values.

Murdock’s legacy will live longer than he did and probably longer than we will.

The Murdock Trust began with $91 million, funded by his estate. As an ultra-high net worth person, Murdock knew that starting a foundation was the best way to ensure his wealth got used for purposes he would support. By putting this in his estate plan, he ensured his retirement goal of starting a foundation would pass.

2. Choose a State and a Name

Your own private foundation must be incorporated, and each state has different legal structure requirements for starting and operating a foundation, whether it is a nonprofit organization or not. You’ll want to investigate which state would be the ideal home for starting a foundation.

It would help if you also gave your foundation a name. The primary obstacle here is that the name you want might already be taken. You need to make sure your preferred name for your foundation is available and secure its rights as soon as possible, and you can ask or consult your other family members to get the best suggestions.

3. Work Through All the Legalities

The mission statement is significant in any foundation, and it should outline the objectives of a foundation and its guiding principles. In conjunction with the mission statement, you will have to prepare bylaws along with many articles of incorporation and conflict-of-interest policy. You don’t need to do all this yourself. You can appoint or hire experts to handle these tasks for you or work with your family.

4. Clarify the Mission and Values of Your Foundation

You must be clear about what you want your private foundations to do. Don’t leave this up to interpretation by lawyers and long-lost relatives. Know what you want to accomplish, and flesh out the details so whoever runs your foundation, whether it’s for educational scholarships or public charities. Even 50 or 100 years from now, it should run in a way that would satisfy you while mitigating any potential personal liability.

5. Appoint Managers of the Assets

As mentioned earlier, private foundation assets span a wide variety. Not all of them require professional management. However, most of your assets will likely require an investment management team or foundation managers if you want to steward them for healthy long-term viability.

The Murdock Trust began with $91 million, has given out $975 million, and is now worth $1.2 billion. They’re doing something right. They’ve already given away Murdock’s initial funding of the Trust ten times, and the foundation is worth even more than what they’ve given.

With intelligent investment planning, the Murdock Trust has avoided the need for fundraising. They’re growing their assets independently at a rate that exceeds their giving. In theory, they can go on forever.

You have three basic options for how to manage your foundation’s assets:

• Manage assets internally

• Manage assets externally

• Manage assets using some combination of both

The Murdock Trust has a lifetime-appointed 3-member foundation board that directs how their assets should be invested. But it farms out the task of managing these assets to outside firms – over 20. So, they leave the nuts and bolts of investment management to external companies.

I suggest doing this internally. In that case, you’d need to hire investment management personnel from within your foundation. Your oversight of this process would differ depending on how you set this up.

6. Develop Selection Criteria for Asset Managers

This step in setting up a foundation is very essential to perfecting it. A minimum of $250,000 can start a foundation. To remain operational, the foundation would require spending some time and the available resources for fundraising.

But as an ultra-high net worth individual, you’ll be in a position like the Murdock Trust’s, starting with tens or hundreds of millions of dollars in existing assets. That means whoever you hire to manage these assets should use methods that align with your foundation’s goals and values.

You’re putting your foundation’s existence in their hands. This is not a job to hand off to your cousin (unless your cousin happens to be a professional wealth manager with decades of experience). Murdock developed a list of criteria for selecting foundation asset managers.

The foundation also requires any investment management firms they work with to have an established institutional client base, among other things. There is nothing too surprising with these selection requirements. But the point is – they have them. They worked out the details of this crucial part of starting a foundation to ensure their assets were professionally managed.

According to Foundation Source, 66% of the 91,000 private foundations in the U.S. have under $1 million in assets. Thus, most foundations face a higher risk of failing than you should be willing to tolerate. Yes, you’ll have more money to start a foundation. Still, you want to give at the scale of the Murdock Trust and continue doing so for generations. In that case, you’ll need to put great care into developing an enduring process for selecting your investment managers.

7. Establish Clear Performance Guidelines

Once they are hired, The Murdock Trust requires its investment managers to follow its performance guidelines.

Again, when starting a foundation, you have control of your governance, assets, and spending. So, use it! Don’t let your investment managers hide from you. Require them to manage your assets according to your values and long-term goals.

When starting a foundation, write how often you will evaluate their performance.

Be transparent about any investment activities, such as venture capital or real estate, and you may not want the foundation to participate in, no matter the reason.

And most important, when starting a foundation, work out a defined asset allocation that aligns with your foundation’s long-term objectives. The Murdock Trust, for instance, has a stated goal to exist perpetually. They don’t want to ever run out of money. Thus, their asset allocation is designed around long-term growth and stability.

8. Hire and Appoint Your Team

You’re focused on starting a foundation. With your foundation’s legal structure established and named and with your investment manager selection criteria and performance guidelines created, you’re ready to launch.

Hire the appropriate people to run the foundation, accept grant requests, evaluate your investment performance, and do all the other tasks necessary to managing private foundations that belong to you.

When starting a foundation, your most enormous administrative task is accepting and processing grant requests. You will need to develop a system for this and hire people to manage it.

9. Fund It and Start Giving

Again, when starting a private foundation, as an ultra-high-net-worth individual, you’re not looking to fundraise or tax-exempt status. You’re giving a large share of your wealth to this so you can achieve your retirement goal of producing a legacy that lasts far beyond your lifetime. And you want that impact of charitable giving to start quickly and find organizations that accept donations immediately. Not twenty years from now.

Whatever you want to see improved globally, you can direct your foundation to pursue those goals by checking annual revenue. That could be political, educational, social, environmental, religious, artistic, scientific, technological, economic, global, agricultural, or many at once.

You can divide your family foundation into separate branches to focus on specific missions. As long as you supervise it, you’ll derive great joy in seeing your wealth used to fund the causes and values you care most about. You’ll realize that starting a foundation was a fantastic idea!

5 Ways How to Start a Nonprofit Organization with No Money

Although starting a nonprofit or charity organization has many financial costs, you shouldn’t have to go broke working to improve the world. This is how a lot of new charities get their start. When you’re navigating establishing a 501 c (3) nonprofit, this guide will provide the necessary steps to begin.

1. Establish your core values. 

Specifying your core principles is always at the top of your to-do list while exploring how to start nonprofit organizations or private operating foundations. Your nonprofit organization’s core principles will serve as the basis for all its decisions, from marketing to participation in market value. So, make sure you pick them carefully and that they support your organization’s goals. If you’ve decided to start a nonprofit out of your passion, you probably already understand what your organization should work for.

2. Costs should be researched, and a budget should be prepared.

The next step to starting a nonprofit is to plan for the necessary expenses, including paying federal tax. Since nonprofit registry costs vary significantly from state to state, you’ll need to research to determine the cost in your case. Numerous resources describe everything you need to know about starting a foundation and the associated costs. Here are a few things to consider.

– Study the IRS website page on starting a foundation (or nonprofit corporation).

– Find out the documents, expenses, and time required to obtain nonprofit status.

– Find out how much it costs to start a nonprofit in your state.

3. Start raising funds for your operational expenses.

Delays in starting a foundation can be attributed to the costs of acquiring 501 c (3) status. Luckily, crowdfunding happens to be the fastest way in which a non-profit startup can obtain funds. An online campaign can help raise funds by calling on your network of friends, family members, and well-wishers.

4. Develop your nonprofit foundation.

When learning how to start a nonprofit, you’ll often come across the requirements for starting a foundation. Although it’s completely optional, you need to consider it for added legal requirements security. Being a nonprofit corporation can help you get more extensive grants, apply for tax-exempt status more efficiently, and benefit from tax deductions. You’ll need to acquire foundation board members, create a board of directors, write bylaws, prepare the necessary documents, and pay the fee.

5. File a request for tax-exempt status.

After thorough tax preparation and acquiring fiscal sponsors, the final process of creating a non-profit is filing Form 1023 with the Internal Revenue Service. This application form defines your nonprofit organization as non-taxable for the federal government. This form may be time-consuming to fill out. It requires a detailed knowledge of your assets, liabilities, and income, which is where help from professionals like Hurwit & Associates can benefit greatly.

Benefits of Having a Private Foundation

There are benefits to having a private foundation. The primary benefit is having tax-exempt status.

Most foundations are established to exist indefinitely, thereby allowing you to have a legacy for which you can be remembered long into the future. The foundation’s assets can be passed on, and the foundation’s investment assets can grow.

Having a foundation that involves the next generation instills philanthropic values. Working for the foundation as a family strengthens these values and a greater social consciousness. It also maintains family ties because the foundation managers are your own family.

Working in a foundation can help the younger generation develop skills they can use in all areas of life, such as leadership and teamwork.

How To Maintain Your Private Foundation

Regulations and penalties

A foundation and most family foundations must not jeopardize its tax exemption status. It must engage primarily in tax-exempt activities as prescribed by state law. Specifically, the organization risks forfeiting its tax-exempt privilege if it fails to submit an annual return for three straight years.

A foundation is required to allocate a minimum of 5% of its assets annually towards grants.

A foundation must not participate in political campaigns, operate for the benefit of its founder, or operate a business not related to its exempt purpose.

Expenses

A foundation incurs expenses from having employees, paying accountants and attorneys, and incurring day-to-day operation and administrative expenses, like running a business. The foundation may need an investment manager or advisor.

The Council on Foundations      

The Council on Foundations is a nonprofit organization whose members include over 800 foundations in the US and globally. It provides a framework for its members to create solutions in philanthropy to improve the world in which we live.

The Council’s vision states that “Philanthropy is a trusted partner in advancing the greater good,” and its mission is to foster an environment in which philanthropy can thrive and support the community of foundations and philanthropy professionals advocating for the greater good. Through this community, the foundation can increase the impact made by foundation grantmakers.

Resources for starting a foundation

The Council on Foundations website provides general information for starting a foundation although it does not provide legal or technical assistance. The Council has a publication that provides details on the laws governing foundations and how to start a foundation.

More help is available from the Nonprofit Law Resource Library managed by Hurwit & Associates. The library includes information on state filing and compliance, governance, board issues, and more.

The National Council of Nonprofits connects more than 20,000 member organizations, helping them be more effective through collaboration and exchange. Members can engage in policy issues that affect philanthropy.

The Foundation Center and Guidestar merged in 2019 to form Candid (Candid.org). Candid is a recognized expert on philanthropy, connecting nonprofits, foundations, and individuals to the resources they need to make the world a better place. It offers training to members; its members can research non-profits, find funding, and improve their foundations.

Having an attorney who understands the tax-exempt and charitable foundation law is critical to starting a foundation. Connect with local legal counsel through your local or state bar association or the American Bar Association.

Council on Foundations is a nonprofit organization that represents more than 800 foundations in the United States and abroad. It offers a model through which its affiliates can harness breakthrough schemes in philanthropy, intending to make the world a better place for humans.

The Council’s vision states that “Philanthropy is a trusted partner in advancing the greater good,” and its mission is to foster an environment in which philanthropy can thrive and support the community of foundations and professionals advocating for the greater good. Through this community, the foundation can increase the impact made by foundation grantmakers.

Resources for starting a foundation

The Council on Foundations website provides general information for starting a foundation, although it does not provide legal or technical assistance. The Council’s publication details the laws governing foundations and how to start a foundation.

More help is available from the Nonprofit Law Resource Library managed by Hurwit & Associates. The library includes state filing and compliance information, governance, board issues, and more.

The National Council of Nonprofits connects more than 20,000 member organizations, helping them be more effective through collaboration and exchange. Members can engage in policy issues that affect philanthropy.

There was a merger of the Foundation Center and Guidestar in 2019, leading to the formation of Candid (Candid.org). Candid is a leading authority on philanthropy, uniting non-profit organizations, foundations, and the beneficiaries of public foundations, giving them everything they need to change this world for the better through their work. It offers training to members; its members can research nonprofits, find funding, and improve their foundations.

An attorney understanding the tax-exempt charity state law is critical to starting a foundation. Connect with local legal counsel through your local or state bar association or the American Bar Association.

Membership in the Council on Foundations

Organizations can qualify for Council on Foundations membership after they have finalized their formation in accordance with state or U.S. legal requirements.

Trust or corporation?

There are fewer trust requirements, but they are more challenging to change, which may require court approval. In contrast, a corporation requires regular meetings, articles of incorporation, and bylaws, among others. However, amendments to the bylaws can be made. The corporate filings format is easily adapted to the needs of most foundations.

Costs of starting a foundation

For the individual or family controlling or funding the foundation, the minimum amount to start a foundation is $500,000 if the foundation has an administrator. If there will be staff, $2 to $5 million would be sufficient.         

Administering a private foundation

In addition to the startup funding for the foundation, you’ll need to fund the ongoing compliance administration of the organization. You may want to have paid staff, or you can hire a consultant or an attorney to manage the foundation. A board can operate the foundation, paid or volunteer.

Regulation of foundations

The U.S. Department of Treasury regulates both private foundations and public charities. At the state level, the attorney general regulates charities and foundations.

What are some alternatives to starting a private foundation?

Donor Advised Funds

Giving through donor advised funds could simplify the administrative burden of philanthropy if reducing the day-to-day chores of your nonprofit subsidiaries is one, among other goals. The donor gives money to the beneficiary fund; he or she writes off this amount when drawing an income tax return; after that, all donor advised funds are formed for donations according to donor ideas. Public charities, such as community foundations, manage the funds. Almost all of them take gifts in the form of cash endowments, publicly traded securities, real estate, and other assets such as restricted stock or life insurance or publicly traded stock. Since the donated funds kept growing, they were invested in a financial market. As for receiving tax-deductible contributions, you can write it off of your taxes—usually up to 50% of the adjusted gross income in the case of cash donations, and at least 30% — if appreciated stock or other assets are given—for the year that included the donation.

One advantage of creating a fund through a community foundation is that community foundation staff know and live in the community they serve and can work closely with you to fulfill your charitable goals. To find a community foundation in your area, visit the Council’s Community Foundation locator.

Supporting Organizations

A supporting organization (SO) is an entity that has tax exempt status and supports a public charity. SOs must meet one of three complex legal requirements tests that assure, at a minimum, that the charity being supported has some influence over the actions of the SO. While SOs are distinguishable from donor advised funds because they are distinct legal entities, they share many of the same favorable deduction limitations.

Planned Gifts

Individual donors may explore various planned giving options, such as bequests, charitable remainder trusts, charitable lead trusts, pooled income funds, and charitable gift annuities. These usually involve a split income arrangement where the donor receives an income stream during their lifetime, and the charity receives an outright gift after a term of years or upon the donor’s death. You can make these planned gifts through community foundations and other charities.

Writing Checks

You also may decide to continue making direct donations. If you are contemplating increasing the size of your gifts, development (fundraising strategies) professionals at your favorite nonprofits will be happy to work with you to honor any specific wishes you may have.

Securing Your Retirement Goals Begins Now

You may dream of starting a private foundation, but that doesn’t mean it will happen.

Despite the ultra-high net worth status of your household, retirement objectives and plans can be knocked off track by unforeseen events. Tax realities might change—surprise medical expenses. Securing your retirement dreams requires taking action today.

If you want to ensure your future retirement goals, such as starting a private foundation, become a reality, schedule a Wealth Management Analysis meeting today with Pillar. We have developed a process that builds an optimized investment plan around achieving your goals. You will know you’re on track to achieve your goals with near absolute certainty. And you will know it continually, every quarter. See how our system assures you of the retirement of your dreams. We recommend that you contact us to Schedule a Wealth Management Analysis meeting. 

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